MARKET WATCH


Global markets were uneven in June. Canadian and international markets fell a few percentage points, while emerging markets and American markets (driven by the tech sector), rose a few.


Commodities were also uneven, but in an unexpected manner. Some commodities remained flat (gold) or rose (WTI oil rose 6%), while Canadian companies that produced those commodities actually fell about 5%. This is most likely a short-term aberration. The producers will likely respond in kind if the value of what they sell (the commodity) continues to rise in the coming months.

 

Looking forward, I remain cautiously optimistic for most of our holdings. The U.S. market looks a little expensive, especially the tech sector – but it continues to have momentum on its side. And as it’s a relatively small part of our overall portfolio, and we’ll likely rebalance in the near future, I’m not overly concerned.

 

As always, feel free to reach out if you have any questions, and if you’re looking for more timely information on the markets, you can find them on the research section of my website, or on my Twitter, Facebook, and LinkedIn feeds.

ASIA CONTINUED


This month I continue my exploration of Asia, mostly focusing on China, Japan, Korea, and Taiwan. The more I read, the more I’m realizing how intertwined their pasts have been, which, of course, complicates their current relationships. As I mentioned before, geopolitical and economic power is shifting faster than most in the west realize, so it only makes sense to study the wisdom acquired by Asia over its rich history. It’s also a fascinating field of study!

BOOKS


Korea: A New History of South and North by Victor D. Cha and Ramon Pacheco Pardo: A concise examination of North and South Korean history since 1945. Despite the chasm between these two nations, before the Cold War, which is most responsible for their difference, there was little to indicate their paths would bifurcate so severely.

 

Aside from being a good introduction to Korean history, this book also explores the idea of reunification. Despite the interest many South Koreans have in reuniting with North Korea, many obstacles remain. First and foremost, the dictatorship in North Korea has no appetite to cede or even share power. But even if it did, a friendly merging of the two countries would be prohibitively expensive for South Korea, given their considerably higher standard of living. For these reasons, reunification is unlikely at best.

ARTICLES


Japan's Population Crisis Just Got Even Worse by Micah McCartney: Japan’s declining population is a serious problem that needs to be addressed sooner than later. With their aging population and low birthrates, any solution will need revolve around increased immigration. The question is, “is Japan willing to do that?”. To date the answer has been no.


China’s Self-Strengthening Movement and Japan’s Meiji Restoration by Guanqiao Huang: In last month’s letter, I referenced Japan’s Meiji Restoration, a two-decade period of unprecedented economic, military, and cultural modernization. Around the same time, China underwent its own attempt to modernize, called the Self-Strengthening Movement. Unfortunately, it wasn’t attempted as wholeheartedly as the Meiji Restoration, which, although yielding improvements, weren't enough to protect Japan from the predatory impulses of the west.

 

Interview: Sarah C. Paine by Noah Smith: Professor Sarah C. Paine of the U.S. Naval War College discusses the current global geopolitical landscape, why the rules-based international order is so important, the war in Ukraine, a potential conflict over Taiwan, and U.S. military capabilities.

 

Delhi heat sends power demand soaring to record high by Cherylann Mollan: India’s capital recently broke several energy demand records. A rising population, prolonged heat wave, and the increased use of cooling devices has put unprecedented strain on India’s infrastructure.

 

This won’t be the last time you read about record energy demand in Asia. As emerging markets continue their outpaced growth, their standards of living will rise, too. As this happens, their need for energy and other natural resources will rise as well.

 

Global warming will increasingly have less to do with the demand of developed countries and more to do with that of developing countries. This means the world’s ability to develop more efficient technologies will be what determines how successful the fight against global warming is.

 

The Philippines, China & Escalation in the South China Sea by Daniel Ortwerth: Citing a Chinese map created in the early 1950s called The Nine Dash Line, China claims most of the South China Sea. Much of this territory is many hundreds of kilometers off its shores, close to the coasts of Vietnam, Malaysia, and the Philippines.

 

This article discusses how China’s increased belligerence towards the Philippines could potentially become a geopolitical flash point. Although the Philippines is no match for China, its mutual defense treaty with the U.S. increases the complexity of the issue. If China acts militarily to enforce its claim, and the U.S. stands firm by its alliance, a significant altercation could be the result.

 

The following three videos show the nuanced (and almost silly) measures that China and the Philippines have implemented to enforce their territorial claims: Video 1, Video 2, Video 3.

 

Asian Financial Crisis: Causes, Response, Lessons Learned - Investopedia: The Asian financial crisis began in July 1997 when Thailand became unable to defend its currency, leading to a rapid devaluation. This cascaded into a regional crisis as other Asian countries also saw their currencies fall in value while experiencing economic turmoil.


The crisis was caused by high levels of debt (borrowed in foreign currency), poor financial supervision, and imbalanced capital flows. The International Monetary Fund intervened to stabilize the affected economies with aid but imposed strict conditions for reform. The crisis led to severe recessions in some countries and prompted the restructuring of economies to avoid similar situations in the future.


Looking back, we can better appreciate the importance of being wary of the following: the interconnectedness of markets, asset bubbles, and especially high debt levels, particularly when borrowed in foreign currency. Why? Because when a country borrows funds in U.S. dollars, for example, and its currency falls by one-sixth of its previous value (as the Indonesian rupiah did, compared to the USD), the relative amount of debt that country owes balloons six-fold the previous amount. That is a serious problem!

 

The Plaza Accord - Investopedia: Great example of unintended consequences. The Plaza Accord was an agreement between the U.S., Japan, and Germany. The purpose was to weaken the American dollar, which had risen almost 50% between 1980 and 1985. As a result, the USD fell as much as 26% against the German and Japanese currencies.

 

Unfortunately, this led to a short-term shock to Japanese export-based industries. To mitigate this issue, Japan dramatically expanded its monetary and fiscal policy to boost its economy. As a result, assets rose dramatically in the late 1980s, creating an asset bubble in financial and real estate markets. When the bubble inevitably burst, Japan endured a “lost decade”. As mentioned a few months ago, the Japanese stock market only recently regained those previous bubble levels - three decades later.

 

NVIDIA CEO Jensen Huang at Stanford University: Technology is moving faster than ever. NVIDIA CEO Jensen Huang explains how, even though computing efficiency is increasing by a million times every decade, demand will surge by a trillion times. He also talks about NVIDIA’s latest microchip, which weighs an incredible 70 pounds and consists of 35,000 parts!

 

How the Century of Humiliation Influences China’s Ambitions Today by Tom Harper: China’s century of humiliation refers to the period from the First Opium War (1839–1842) to 1949, when it became The Republic of China. Although more than seven decades ago, this scar remains prominent and continues to influence Chinese policy. First and foremost, it has vowed to never endure subservience again. It also effectively uses this experience to commiserate and entice countries with similar histories to join Chinese initiatives, like its Belt and Road initiative.



How I Think About Debt by Morgan Housel: "As debt increases, you narrow the range of outcomes you can endure in life." I’d argue you could replace the word “debt” with “risk”, and it would apply equally well.

VIDEOS

 

Chiang Kai-Shek: The General who Created Modern China: Chiang Kai-Shek is perhaps the most significant modern historical figure most people have never heard of. Kai-Shek led the Chinese Nationalist forces that ruled China shortly after the fall of the Qing Dynasty. The onslaught of superior imperial Japanese forces, while often fighting Mao Zedong’s Communist forces, took its toll. Following Japan’s surrender at the end of the Second World War, his weakened Nationalist forces lost China’s civil war to the aforementioned Mao Zedong’s. To survive, he and his forces fled to the island of Taiwan in 1949, where he ruled until his death in 1975.

 

I’m currently reading a long biography on Chiang Kai-Shek, so I’ll have more to say about him in the next month or two.

 

Mao's Art of War: The Long March and the Chinese Civil War - Real Time History: Speaking of Mao Zedong, this video covers the first 50 years of the 20th century from his perspective. Given the Communists won China’s civil war, it’s easy to forget they were once on the brink of survival.

 

Why China won't attack Taiwan - John Mearsheimer and Lex Fridman: One of the most significant geopolitical risks is that of China attacking Taiwan. Scholar John Mearsheimer argues this is unlikely to occur due to the sheer difficulty of amphibious assaults. He also discussed the current global alliance structure and the need to ensure provocative measures are restrained.

SELECTED INSIGHTS


“Fall in love with some activity, and do it! Nobody ever figures out what life is all about, and it doesn’t matter. Explore the world. Nearly everything is really interesting if you go into it deeply enough. Work as hard and as much as you want to on the things you like to do the best. Don’t think about what you want to be, but what you want to do.” 

- Richard Feynman, The Feynman Lectures on Physics

 

“People are always trying to add more stuff to life. Reduce it to simpler, pure moments.” 

- Jerry Seinfeld

Matthew Lekushoff
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matthew.lekushoff@raymondjames.ca
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